Potential Upside to Adobe Based on New Market Levels

Adobe (NASDAQ:ADBE) recently announced its third quarter 2010 earnings results, in which the management gave weak outlook for the fourth quarter of 2010 [1]. Adobe’s stock declined by 20% from $33 on Tuesday to $26 the following day.

Management cited the slow education market, which is the company’s largest business vertical, and the weak Japanese market, which is the company’s second largest market after the U.S., as the reasons for the weak outlook. We are not as bearish as the market on Adobe shares and have updated the Trefis price estimate for Adobe stock down slightly from $38 to $36. Despite Adobe’s weak outlook, we believe that the company will continue to dominate the creative software market over the long term.

Adobe released the newest version of its flagship product Creative Suite version 5 in June 2010, but sales have trended below Trefis expectations. Management’s weak outlook suggests that Adobe’s creative software market share for 2010 will be around 44% rather than the prior Trefis market share estimate of 46% [2].

Demand for Adobe’s creative software is based on new releases which leads to cyclical market share. We expect that Adobe will continue to maintain share and have around 42% share by the end of Trefis forecast period.

However, there remains risk to our estimates. In the future, Adobe may not be able to deliver incremental software features that are compelling enough for buyers to upgrade and such failures could further hurt its market share. There could be a downside of 5% to the $36 Trefis price estimate for Adobe’s stock if its market share were to decline to around 38% by 2016, instead of around 42% that we forecast.

SEC filings provide information on annual growth in the the number of licenses sold. We have used these growth figures over time along with estimates of the number of licenses to calculate the licenses sold in each historical year.